FINANCIAL ACCOUNTING & REPORTING 3

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Statement of Comprehensive Income

Module 0011 Week004- FinAcct3 Statement of

Comprehensive Income
Net income results from revenue, expense, gain and loss transactions. The
income statement summarizes these transactions. The statement can further
classify income by customer, product line, or function, or by operating and
nonoperating, continuing and discontinued, and regular and irregular
categories.
Revenues take many forms, such as sales, fees, interest, dividends, and rents.
Expenses also take many forms, such as cost of goods sold, depreciation,
interest, rent, salaries and wages, and taxes, gains and losses also are of many
types, resulting from the sale of investments or plant assets, settlement of
liabilities, and write-offs of assets due to impairments or casualty.
Reporting these elements are important as most decisions-makers find the
parts of a financial statement to be more useful than the whole. As indicated
on previous lesson, investors and creditors are interested in predicting the
amounts, timing and uncertainty of future income and cash flows. Having
income statement elements show in some detail and in comparison with
prior years’ data allows decision-makers to better assess future income and
cash flows.

At the end of this module, you will be able to:

1. Define the elements of income statement
2. Understand the nature, recognition and measurement of revenue,
expenses, gains and losses
3. Understand the distinction between income and revenue
4. Determine the disclosure requirements of revenue, expenses, gains and
losses

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Statement of Comprehensive Income

Elements of income statement

Income
The Conceptual Framework defines income as “increase in economic benefit during the
accounting period in the form of inflow or increase in asset or decrease in liability that
results in increase in equity, other than contribution from equity participants.”
Simply stated, income is inflow of future economic benefit that increases equity, other than
contribution by owners.
Sources of income
Income is derived from the following ordinary activities:
a) Sales of merchandise to customers
b) Rendering of services
c) Use of entity resources
d) Disposal of resources other than products
Expense
Under the Conceptual Framework, expense is defined as “decrease in economic benefit
during the accounting period in the form of outflow or decrease in asset and increase in
liability that results in decrease in equity, other than distribution to equity participants.”
Simply stated, expense is outflow of future economic benefit that decreases equity, other
than distribution or dividend paid to owners.
Expenses include the following:
a) Cost of sales or cost of goods sold
b) Distribution costs or selling expenses
c) Administrative expenses
d) Other expenses
e) Income tax expense

Revenue, expenses, gains and losses

Definition
Net income results from revenue, expense, gain, and loss transactions. The income statement
summarizes these transactions. The statement can further classify income by customer,
product line, or function, or by operating and nonoperating, continuing and discontinued,
and regular and irregular activities. The following lists more formal definitions of income-
related items, referred to as the major elements of the income statement:

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Statement of Comprehensive Income

 Revenues – inflows or other enhancements of assets of an entity or settlements of its

liabilities during a period from delivering or producing goods, rendering services, or
other activities that constitute the entity’s ongoing major or central operations.
 Expenses – Outflows or other using-up of assets or incurrences of liabilities during a
period from delivering or producing goods, rendering services, or carrying out other
activities that constitute the entity’s ongoing major or central operations.
 Gains – Increases in equity (net assets) from peripheral or incidental transactions of
an entity except those that result from revenues or investments by owners.
 Losses – Decreases in equity (net assets) from peripheral or incidental transactions
of an entity except those that result from expenses or distribution to owners.
Revenues may take many forms, such as sales, fees, interest, dividends, and rents. Expenses
also take many forms, such as cost of goods sold, depreciation, interest, rent, salaries and
wages, and taxes. Gains and losses also have many types, resulting from the sale of
investments or plant assets, settlement of liabilities, and write-offs of assets due to
impairments or casualty.
Distinction between income and revenue
The definition of income encompasses both revenue and gains.
Technically, revenue arises in the course of the ordinary regular activities of an entity and
is referred to by a variety of different names including sales, fees, interest, dividends,
royalties and rent.
Gains represent other items that meet the definition of income but do not arise in the course
of ordinary regular activities of an entity.
The sales of merchandise to customers and the revenue from rendering of services are the
principal income of the entity.
Recognition
Income recognition principle
The basic principle is that “income shall be recognized when earned.”
The Conceptual Framework provide that “income is recognized when it is probable that an
increase in future economic benefits related to an increase in an asset or a decrease in a
liability has arisen and that the increase in economic benefits can be measured reliably.”
Accordingly, the point of transfer of significant risks and rewards of ownership of the goods is
the point of income recognition.
PAS 18, paragraph 14, provides the following conditions for the recognition of revenue from
sale of goods:
a) The entity has transferred to the buyer the significant risks and rewards of ownership
of the goods.

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Statement of Comprehensive Income

b) The entity retains neither continuing managerial involvement nor effective control
over the goods sold.
c) The amount of revenue can be measured reliably.
d) It is probable that economic benefits associated with the transaction will flow to the
entity.
e) The costs incurred or to be incurred in respect of the transaction can be measured
directly.
PAS 18, paragraph 19, provides the following conditions for the recognition of revenue from
rendering of services:
a) The amount of revenue can be measured reliably
b) It is probable that the economic benefits associated with the transactions will flow to
the entity.
c) The stage of completion of the transaction at the end of reporting period can be
measured reliably
d) The costs incurred for the transaction and the costs to complete can be measure
reliably
Revenue from interest, royalties and dividends
Interest revenue shall be recognized on a time proportion basis that takes into account the
effective yield on the asset.
Royalties shall be recognized on an accrual basis in accordance with the substance of the
relevant agreement.
Dividends shall be recognized as revenue when the shareholders’ right to receive payment
is established, meaning, when dividends are declared
Other income recognition
a) Installation fees are recognized as revenue over the period of installation by reference
to the stage of completion.
b) Subscription revenue should be recognized on a straight line basis over the
subscription period.
c) Admission fees are recognized as revenue when the event takes place.
d) Tuition fees are recognized as revenue over the period in which tuition is provided.
Expense recognition principle
The basic expense recognition principle means that “expenses are recognized when
incurred.”
The Conceptual Framework provides that “expenses are recognized when it is probable
that a decrease in future economic benefits related to decrease in an asset or an increase
in liability has occurred and that the decrease in economic benefits can be measured
reliably.”

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Statement of Comprehensive Income

Disclosure requirements
PAS 1, paragraph 97, provides that when items of income and expense are material, their
nature and amount shall be disclosed separately.
Paragraph 98 provides the circumstances that would give rise to the separate disclosure of
items of income and expense.
Items of income and expense requiring disclosure
a) Writedown of inventory to net realizable value and reversal of such writedown
b) Writedown of property, plant and equipment to recoverable amount and reversal of
such writedown
c) Restructuring of the activities of an entity and reversal of any provision for the cost
of restructuring
d) Disposal of an item of property, plant and equipment
e) Disposal of investment
f) Discontinued operation
g) Litigation settlement
h) Other reversal of provision

References and Supplementary Materials

Books and Journals

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 3; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Valix, C., Peralta, J. & Valix, C.A; 2016; Financial Accounting Volume 1; Metro Manila,
Philippines; GIC Enterprises & Co., Inc.

Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield; 2013; Intermediate Accounting;

United States; John Wiley & Sons, Inc.

Online Supplementary Reading Materials

Income Statement – Reporting Comprehensive Income (Topic 220), Revenue Recognition
(Topic 605), and Revenue from Contracts with Customers (Topic 606);
https://asc.fasb.org/imageRoot/15/115597515.pdf; December 1, 2017

IAS 18 Revenue; http://www.ifrs.org/issued-standards/list-of-standards/ias-18-

revenue/; December 1, 2017

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Statement of Comprehensive Income

Online Instructional Videos

Balance Sheet and Income Statement Relationship;
https://www.khanacademy.org/economics-finance-domain/core-finance/accounting-and-
financial-stateme/financial-statements-tutorial/v/balance-sheet-and-income-statement-
relationship; January 10, 2018

Income Statement Explained: Comprehensive Income Statement Tutorial- Profit & Loss
Statement;
https://www.bing.com/videos/search?q=statement+of+comprehensive+income&&view=d
etail&mid=7483CCBE7F3A38AD2C2D7483CCBE7F3A38AD2C2D&FORM=VRDGAR;
January 10, 2018

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